Budget 2012 will probably carry some regional sops in the form of continuation of exemptions on excise given in the North East states plus some existing subsidies on transportation. One does not expect these to be withdrawn probably because the government feels the sensitivity of NE issues is more important than the limited additional income that would accrue from withdrawing some of these benefits.

So far so good. But there is also the presumption that as growth takes place some benefits would accrue to the poorer states in the eastern part of the country. The argument is that as some states grow faster than others, the slower growing states would attract capital as opportunities dry up elsewhere and as competition in the faster growing states raises the labour and other input costs thus making it profitable for producers to shift production to other states.

This is the received theory and seems eminently reasonable. This theory is actually the one on which the principle of free trade is based. The celebrated Heckscher-Ohlin trade theory was actually first propounded as a theory of regional trade. The basic principle was that free trade in commodities would lead to location of production in areas best suited to them.

The general idea is that as commodity prices equalise between regions (countries) the productivity of capital and labour would also tend to equality as producers would move production around to benefit from differential input costs. In other words, geography determines trade.

One of the reasons why Paul Krugman got a Nobel in Economics a few years back was in his challenging this notion. He actually argued the opposite: that trade may determine geography. The argument was something like this: The only factor of production which is immovable is land.

However, as the importance of agriculture declines, manufacturing and service sectors can be quite "footloose" in the long run. Since the majority of national income now accrues to workers in manufacturing and services, producers driven by demand (the demand-side basis of trade) would prefer to locate near the consumers. This not only allows for economies of scale to be exploited leading to price and costs reductions but also provides greater scope to get suitable employees.

This is the usual economics of agglomeration. However, since transport costs are high, price of commodities would tend to be higher in non-producing centres. Hence, consumers would also have an incentive to live near these supply centres as this would lead to higher real wages.

So one gets migration of workers from other areas to these manufacturing centres. While there is insufficient space to detail further Krugman's ideas on trade, what is interesting is the implication of his theory when applied to regions within a country. The most remarkable implication is that regional concentration is a strong possibility. This leads to unequal distribution of production and income.

The issue is the existence of a "knife edge" at a point where a small change precipitates the movement of production and workers from one region to another. Even more important, there is no automatic tendency for this regional concentration to be reversed. It could in fact increase. The theory is obviously a long run one.

One application to India is to look at interstate distribution of income and/or population. For reasons of space I will look at the latter. In the accompanying table (Census 2011) are listed some states and their towns with a population of more than 1 million (a small number by Indian standards). I have looked at all the top 53 towns but reported only a few.

Two observations are in order. One, it is the industrially welldeveloped states where towns are developing. In fact, the figure seven towns in UP is misleading as three owe their growth to proximity to Delhi. The second observation is more worrying. In the table (and, in fact, in the top 53 towns) there are only two in the eastern part of the country. It is also sobering that Kolkata has failed to develop as a growth node for the eastern region probably because of the anti-industrialisation bias of the previous Left government.

Contrast the three towns in Rajasthan which normally has a low density of population. After 60 years of planning inter-state inequalities are glaring. There are plenty of studies to show this is also true of income inequalities. The theory outlined above indicates this inequality is likely to be perpetuated. This calls for urgent efforts (manufacturing growth in particular) to promote industrial development in the eastern part of the country.

In a previous article (January 13, 2012) I had argued that politically it is necessary for reforms to move to the states. There seems to be an economic necessity too and the Centre has a major role to play here. Democratic compulsions will ensure that balanced growth will need to be fostered. As a theory, the "trickle-down" hypothesis seems to rest on insecure economic foundations.